Supreme Court to Decide When States May be Sued in Other States’ Courts

State sovereignty is front and center in Franchise Tax Board of California v. Hyatt. This case is before the U.S. Supreme Court for (possibly a record-breaking) third time. This time the Supreme Court will decide whether to overrule Nevada v. Hall (1979), which permits a state to be sued in the courts of another state without its consent. In Hyatt II (2016), the Supreme Court deadlocked 4-4 on this question shortly after Justice Scalia died.   

Gilbert Hyatt was audited by the Franchise Tax Board of California (FTB) in 1993. He sued FTB in Nevada state court for a number of intentional tort and bad faith conduct claims. FTB argued that the Nevada courts were required to give FTB the full immunity to which it would be entitled under California law. In 2003, the U.S. Supreme Court held in Hyatt I that Nevada courts did not have to give FTB full immunity. The Nevada courts eventually awarded Hyatt over $400 million in damages, which lead to a second U.S. Supreme Court case. In Hyatt II the Court limited the amount of damages that Nevada courts could award to the amount that they could award against their own agencies.

Following Hyatt II the Nevada Supreme Court capped damages for FTB at $50,000. In Hyatt III, FTB has again asks the U.S. Supreme Court to overrule Nevada v. Hall. If it does, FTB could not be sued in Nevada state court.

FTB argues that Hall was decided incorrectly. “Hall stands in sharp conflict with the Founding-era understanding of state sovereign immunity. Before the adoption of the Constitution, it was widely accepted that the States enjoyed sovereign immunity from suit in each other’s courts.” 

Perhaps breaking another record, 45 states joined a certiorari stage amicus brief asking the U.S. Supreme Court to overturn Nevada v. Hall. According to their brief: “States all too frequently find themselves the targets of private-plaintiff lawsuits filed in the courts of other States. Such cases not only insult the sovereign dignity of defendant States, but also pose the real risk of exposing States to judgments unrestrained by any concern for local fiscal impact. And where, as here, the State is haled into another State’s courts based on how it has exercised its authority to conduct tax audits, the interest in preserving immunity as an attribute of State sovereignty is particularly acute.”

Hyatt claims that Hall wasn’t wrongly decided because it is based on a “key distinction that has been drawn from the earliest days of American history”: “the difference between a state’s sovereignty in its own courts and its sovereignty in the courts of another sovereign.” Hyatt also claims that since Hall was decided in very few cases have state governments been sued in the courts of other states.